THE Finance Ministry seems all set to grant full excise duty exemption for powerlooms, thereby, undoing the 2003-04 Union Budget's move to `complete the CENVAT chain' across all segments of the textile industry.

Restoration of the earlier regime of exempting powerlooms  which account for an estimated 65 per cent of the country's total fabric production  from payment of excise duty was a major poll promise, particularly of the Dravida Munnetra Kazhagam-led alliance that recently swept the Lok Sabha elections in Tamil Nadu.

Currently, excise exemption to powerlooms (and also garmenting units) is available on a turnover-based criterion. Powerloom units with annual turnover of up to Rs 30 lakh do not have to pay excise for clearances up to Rs 25 lakh.

Further, this exemption is given even if a number of units operate within a particular premise, each of them recording turnover of up to Rs 25 lakh.

The powerloom industry  especially concentrated in centres such as Salem, Erode and Karur in Tamil Nadu  has been pressing for blanket excise exemption, irrespective of the size or turnover of units. The organised textile industry sector has vociferously opposed this move on grounds that it makes fabric production by large mills unviable.

Further, since the powerloom unit does not pay excise, the subsequent processors, including garmenting units, cannot avail CENVAT credit, leading to the break-up of the textile value chain.

But according to Finance Ministry sources, "the present regime of an unbroken CENVAT chain looks good on paper, but does not factor in the ground realities of the actual production cycle".

The Ministry is "at a fairly advanced stage of taking a final view on the matter" and "we will explain the rationale behind the decision we will take".

The sources dismissed the contention that the demand to restore excise exemption for powerlooms was emanating from Tamil Nadu alone. "It is an all-India demand and coming also from States such as Maharashtra, Andhra Pradesh and Gujarat".

They also highlighted that the nature of the textile production cycle in India was fundamentally different from other countries, including China "and we cannot ignore this ground reality".

In his 2003-04 Budget, the former Finance Minister, Mr Jaswant Singh, had initially withdrawn excise exemption for all knitted and unprocessed woven fabrics, while doing away with the scheme of `deemed credit' so as to complete the CEVAT chain.

Even for the hand-processed fabric, the excise exemption was limited to only those units not consuming power or steam. However, following representations, he introduced the Rs 30 lakh turnover-based excise exemption criterion for powerlooms to keep genuinely small weavers out of the excise net.